Recessions are an inevitable part of our economy, and they can severely impact a nonprofit’s ability to operate.
With an economic downturn, nonprofits often experience two-fold pressures of declining donations and increasing demand for some subsidized services – particularly services that benefit people in economic precariously positions.
The pressures from less revenues and greater costs mean nonprofits need to quickly take drastic actions to sustain themselves – often involving layoffs.
It’s important for nonprofits to take a long-term view and focus on measures that will help them both fulfill their mission during the recession and emerge stronger as the economy recovers. Here are some tips on how to prepare your nonprofit to effectively weather the next economic downturn:
1. Estimate how bad it could be for your organization:
Even without a crystal ball or knowing when the next recession is coming, nonprofits can still estimate various scenarios
Estimate the effect on fundraising ability Charitable donations often decline during recessions, but it is uneven across nonprofit sectors and donor segments.
For example, overall donations dropped 5% during two consecutive years for the recession that began in 2008, but took until 2012 to return to the pre-recession level. This reduction was fairly evenly distributed across nonprofit sectors.
However, corporate giving declined 20% in 2020, in response to the recession caused by the COVID-19 pandemic, while donations from individuals and foundations actually increased. As a result, nonprofits most dependent on corporate donations (dollars and in-kind donations) bore the brunt of this decline.
For a much more nuanced prediction of how the next recession may impact your organization, look at your organization’s own historical data. What happened to overall donations? How did each donor segment perform (e.g., large/small individual gifts, corporate donations, grants, etc.)? How long did it take for the segments that declined to come back? Connect this analysis with your current donor mix to estimate a range of decline. This will allow you to know whether to plan for a 30% decline over 1 year or a 10% decline over 3 years.
Estimate the impact on demands for goods and services
Similar to fundraising revenues, fee-for-service programs may experience declines as individual and corporate budgets tighten.
However, programs that benefit people in economic precarious positions may increase. During the recession that began in 2008, the number of individuals below the poverty line jumped 25% from 2007-12, before it began to come down. The latest data about the recession that began in 2020 shows the number of individuals below the poverty line has increased by 12% from 2019-21, which is a slightly slower rate than the 2008 recession.
As a result of these economic slowdowns, nonprofits that assist people experiencing financial insecurity saw demand for their services jump.
To get a clearer understanding of how demand for your nonprofit’s services may change, again, look at internal data from the last two recessions.
Focus Strategy Advisors can assist your nonprofit in estimating the potential impact of a recession with analyses leveraging data from local, public, and proprietary sources
2. Decide how you want to react
Depending on your nonprofit’s mission, you may want to react to a recession different in different ways. For example:
Scale-up: An organization that provides critical goods and services to people experiencing financial insecurity may decide they need to increase their capacity to serve the increasing demand. These nonprofits have a mission to provide to people in need, and recessions are oftentimes when that need is greatest. This probably means they need a strategy to improve their operating and fundraising capacities in place as the recession begins.
Hold the same scale: Alternatively, an educational nonprofit may expect consistent demand for their services and decide they want to maintain the same scale. This will lead to a different set of operating decisions around operating and fundraising capacities.
Hunker down: Some nonprofits may have critical grants at-risk during recessions and will find themselves in the challenging position of having to make drastic cuts to continue to operate. They will have to decide where they want to continue to focus, where they will deprioritize, and augment the operating and fundraising strategies accordingly.
By taking the time to decide how your nonprofit wants to react now, you have time to create buy-in among stakeholders and improve decision making when the time comes.
Focus Strategy Advisors facilitates decision making for nonprofit partners and providing key "what if" scenario analyses to help answer challenging questions and create organizational alignment
3. Create a Contingency Plan
Now that you know how you want to react, it’s time to make a plan to pivot the organization. This step is particularly important if your goal is to be able to scale-up services or your revenues are particularly at-risk during an economic downturn.
It’s important that this be a phased plan. Again, at the beginning of a recession, no one really knows how long it will last or how bad it will get. Plan small reactions early, increasing as necessary – you probably don’t want to overreact.
Key elements of the plan:
Identify and Monitor Trigger Metric(s): Trigger metrics are those that will compel your organization to begin to take action. Internally, look at key Fundraising budget milestones and service demand metrics. If they are off budget by 5-10%, it is probably time to start taking action. There are also some external metrics, such as that can validate what your organization is experiencing is in-fact a recession and not a “blip.” The Bureau of Economic Analysis releases trailing quarterly GDP data regularly. For a forward-looking view, many investors look at the spread between 10-year and 2-year Treasury bonds – if this the value is negative, it means the broad market is expecting a recession imminently.
Identify the actions the organization will take. Nonprofits will often consider several steps to improve revenue, focus resources, decrease costs, and manage finances:
Proactive fundraising: approach key financial sponsors early and bring them into your plans. Show them how you plan to respond and ask for a commitment if conditions worsen – this can tighten relationships and reduce revenue uncertainty. Many other existing donors will also be responsive to asks for help.
Operating changes: if your nonprofit’s plans involve scaling up or down, create a plan to make those adjustments, e.g., hiring and terminations, process changes, team reassignments, etc.
Cost-cutting: there are also broader categories of cost reductions that should be pursed as needs and available funds change, such as renegotiating supplier contracts, refinancing high interest loans, reducing non-critical expenses, labor reductions, etc.
If you expect to be in a precarious financial position, it is important to review 90-day forward-looking cash flow estimates regularly to ensure balances remain sufficient for payroll and other obligations.
Having a reaction plan allows important decisions about trade-offs and consequences to be evaluated in an environment without the time constraint and pressure of being in a crisis.
4. Reduce Risk Now: Focus on Efficiency and Diversity Funding Sources
Give your organization more runway before drastic action is necessary by improving your organization’s current financial situation.
There are many ways nonprofits can improve efficiency, but the main goal is to either remove cost or increase total output (i.e. impact). Push teams to reimagine their day-to-day workflows. Focus on process improvements that meaningfully increase capacity, drive greater utilization of services organizations, outsource non-core activities, etc. Sometimes, investments in automation or other technology are required; these investments are oftentimes easier to make before cash flow becomes a constraint.
Diversifying funding sources can reduce revenue risk for nonprofits. This is particularly important if your nonprofit relies on a small number of generous financial sponsors. Depending on your nonprofit’s unique position, funding diversification could mean growing the number of sponsors from the current target donor segments (e.g., more corporate donors), expanding into new donor segments (e.g., applying for foundation grants for the first time), launching or growing fee-for-service offerings, etc. The intent is to reduce your organization’s financial exposure to a big reduction from an important sponsor.
Taking action to improve efficiency and diversify funding sources now allows nonprofits time to fully implement these changes and begin realizing benefits before a crisis occurs.
Focus Strategy Advisors partners with nonprofit management teams to help improve operational and fundraising efficiency and effectiveness
The key point here is: Be prepared for a recession. We all know one will come eventually and there will be another some time after that. By estimating how bad the impact could be on your organization, determining how to react, building a contingency plan, and reducing financial exposure now, nonprofits can best position themselves to continue to deliver their mission, even when macroeconomic forces are moving against them.
To learn more about how your nonprofit can prepare for a recession, contact Focus Strategy Advisors at info@FocusStrategyAdvisors.com
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